If companies are subject to debarment on a “general basis”
for all perceived misconduct in all areas of activities—government
or non-government—the question arises: What limits, if any,
are there on the government’s interpretation of a cause for
suspension or debarment?
Front-page stories on Enron, Arthur Andersen and WorldCom should
make evident that failure to fully integrate corporate compliance
throughout the company could prove fatal to government business.
The federal government is required to award contracts only to responsible
contractors. Corporate misconduct brought to an agency’s attention
may trigger review by a suspension and debarment official to determine
whether a lack of business integrity or an inability to satisfactorily
perform government contracts exists. Any agency may initiate suspension
and debarment proceedings against contractors. The General Services
Administration maintains the centralized “excluded parties
listing system.”
The intended purpose of suspension and debarment proceedings is
to consider a company’s “present responsibility”
to do business with the government, and, theoretically, not to punish
a contractor. As a result, the suspension and debarment official
traditionally limited examinations to a company’s record as
a government contractor. Suspension or debarment based on unrelated
conduct was rare because there appeared to be less of a logical
connection to suspending or debarring a company from federal work
where a contractor performed well, but ran afoul of legal problems
in other, unrelated areas.
With the collapse of Enron and the involvement of Arthur Andersen,
its outside auditor, the Office of Management and Budget asked GSA
to initiate suspension and debarment proceedings, although no government
contracting impact could be cited. GSA suspended Enron and debarred
Arthur Andersen. Enron had not been a major government contractor,
but Arthur Andersen had a well-established government contracts
division with a sterling record as a contractor. Nonetheless, GSA
debarred Arthur Andersen based on conviction of offences unrelated
to any government contracts. This was one of many legal blows leading
to the dissolution of Andersen.
More recently, GSA initiated proceedings to debar WorldCom Inc.,
which was accused of corporate fraud not directly related to the
performance of government contracts. The company’s government
contracting divisions or personnel were not implicated, and the
company had not been indicted by the government. However, GSA took
action based on, inter alia, information provided by GSA’s
Office of Inspection General and the “Thornburgh Report”
that had been prepared for the WorldCom board of directors.
The integrity of government contracting was not at risk in either
the Enron, the Arthur Andersen suspension and debarments nor with
respect to WorldCom. As a policy matter, while the government is
always obligated to protect the integrity of contracting, the suspension
and debarment official role in purely commercial or securities matters
has been less clear. At a minimum, the ability of any contracting
agency to analyze complex auditing issues or Sarbanes-Oxley requirements
might be less extensive than that of the Securities and Exchange
Commission, particularly where no government contract is involved.
The breadth of those grounds appropriate for findings of non-responsibility
has been fought on the regulatory front as well. In late 2000, the
Clinton administration released a set of contractor responsibility,
or so-called “blacklisting” rules, which went well beyond
government contracting performance requirements. These rules empowered
contracting officers to deem a contractor non-responsible based
on environmental, labor or other “unsatisfactory business
practices,” without providing the contracting officer resources
to analyze these areas. Also, there was no connection established
between the proposed responsibility criteria and a company’s
present responsibility or lack thereof to perform government contracts.
These rules were withdrawn in 2002.
Even though we no longer have the “blacklisting rules,”
and suspension and debarment actions most often arise from primarily
government contracting activities, it would be incorrect to assume
that federal agencies, particularly GSA and the Defense Department,
always will ignore serious corporate compliance issue in areas unrelated
to government contracting. Increasingly, the trend has been for
suspension and debarment officials to scrutinize any dishonest or
serious corner-cutting dealings with shareholders or in commercial
transactions—the assumption being the company might shortchange
the government as well.
Similarly, Congress remains interested in contractor accountability
and corporate “good citizenship” across-the-board. There
are developments in corporate governance legislation and criminal
law that will continue to affect all contractors. The Sarbanes-Oxley
Act and the Organizational Sentencing Guidelines set standards far
broader than the basic Federal Acquisition Regulations. Corporate
compliance directors for government contractors, therefore, are
well advised to ensure that their training and reporting programs
broadly focus on good corporate citizenship, whether or not arising
from government contracting. Moreover, as noted in NDIA’s
benchmark Statement of Defense Industry Ethics (National Defense,
Nov. 2004), this is further evidence that there is a compelling
case made for ensuring that the chief executive officer is also
the chief ethics officer.
Dorn McGrath is a senior shareholder with the Greenberg Traurig
law firm. Retired Army Brig. Gen. D. Michael Kelleher, who has served
as a corporate ombudsman in a high-profile suspension and debarment
matter, contributed to this article.